ETFs – Why are they popular?

Four reasons investors choose exchange-traded funds 

An exchange-traded fund (ETF) is, as its name suggests, a fund that’s traded on a stock exchange. ETFs are generally designed to track a particular index or combination of indices. For example, a Canadian equity ETF might track the S&P/TSX Composite Index, while a bond ETF might track the FTSE TMX Canada Universe Bond Index and a balanced ETF might track a specific percentage of each of those indices.

Since hitting the market about 25 years ago, ETFs have been a popular choice with investors. Here are four reasons why.

  1. Low cost

Most ETFs aren’t actively managed, which means the portfolio manager isn’t actively buying and selling holdings in an attempt to outperform the broader market. Instead, they track an index, which is a passive management strategy. Passive strategies tend to cost less than active strategies because they require less work.

However, some are more actively managed and use more complicated strategies to decide which securities to hold. Those ETFs would generally have higher costs, but still often lower than traditional mutual funds.

  1. Easy to track

ETFs are publicly traded, so it’s easy to find current information about them. Go to the website for the stock exchange an ETF trades on, enter its ticker symbol and you’ll find its current market price along with other key financial data about this ETF. A lot of ETFs also publish their holdings daily, which you’ll find on the website of the company that issued the fund.

  1. Easy to trade

You’ll need to go through an investment firm or online brokerage, but you can buy and sell shares of an ETF whenever the stock exchange on which it trades is open.

  1. Diversification

ETFs hold a basket of securities, whether stocks, bonds, commodities or other assets. This is considered less risky than investing in a single stock or bond, because the price of some holdings may increase while the price of other holdings declines. Holding several ETFs that track a broad range of indices improves diversification even more, helping to create a less-volatile investing experience by “smoothing out” returns over time.

 

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